The dollar index hovered around 106.5 on Tuesday, nearing the two-month lows reached last week, as traders assessed the risks of a potential escalation in the trade war.
Dollar eases to approach two-month lows
President Donald Trump signaled that tariffs on Mexican and Canadian imports, which had been previously paused for a month, will take effect next week, reigniting concerns over the potential economic fallout from heightened trade tensions. Reports also surfaced that the US is tightening restrictions on China’s chip industry and pressuring other governments to follow suit, stoking fears of further disruptions in global supply chains, particularly in the tech sector.
Concerns over the US economic outlook persist
Meanwhile, concerns over the US economic outlook persisted after last Friday’s flash S&P Global PMIs unexpectedly revealed a contraction in the services sector, despite an acceleration in manufacturing growth. The unexpected contraction in services—an area traditionally seen as a backbone of the US economy—raised alarm bells about the broader health of the economy. The report also pointed to rising input costs, adding to inflationary pressures, and weakening business expectations amid growing uncertainty over government policies. These factors have prompted traders to reevaluate their outlook for the US economy, increasing bets on the Federal Reserve implementing rate cuts in the near future.
Expectations on Fed moves
Markets are now pricing in approximately 50 basis points (bps) of reductions in the federal funds rate this year, reflecting concerns that the Fed may need to take more aggressive action to support economic growth amid rising risks. This shift in expectations has added volatility to the dollar, with traders weighing the impact of potential rate cuts on the currency’s relative attractiveness compared to other major currencies. The combination of trade uncertainty, economic concerns, and a possible dovish shift in Fed policy has kept market participants on edge, with the outlook for the dollar remaining uncertain as developments unfold.
